The Australian Accounting Standards Board is responsible for developing our sustainability reporting standards. AASB chair Dr Keith Kendall GAICD updates us on progress so far.
Since November 2021, sustainability reporting has been gathering momentum at an unprecedented rate. While having been important for quite some time under various other guises — such as corporate social responsibility, triple bottom line reporting and ESG reporting — the establishment at COP26 of the International Sustainability Standards Board (ISSB) provided a special opportunity to enable a “global baseline for sustainability reporting” to be developed. The ISSB, for the first time, provides a singular focal point through which corporate reporting beyond the financials is able to achieve the dual characteristics long expected of financial reporting — consistency and comparability.
The Australian Accounting Standards Board (AASB) undertook responsibility for developing sustainability reporting standards in Australia. The AASB’s efforts have taken on added impetus since the ISSB finalised its S1 and S2 standards. Most notably, the AASB released an exposure draft based on S1 and S2 in October 2023 and then undertook the largest stakeholder consultation in its history, receiving 120 written submissions, more than 300 survey responses and conducting virtual and in-person roundtables across Australia.
This high degree of engagement recognises the importance of this topic as well as the AASB’s attempts to hear from stakeholders who do not normally participate in consultations.
It is difficult to overstate the importance of sustainability reporting for both the accounting profession and the Australian corporate world.
The AASB exposure draft of S1 and S2 was designed to align closely with ISSB final standards, while also adopting positions designed to elicit feedback, consistent with our consultation process. At the time of writing, the board is meeting at an increased frequency to finalise as soon as possible. It is anticipated the final standards will be even more closely aligned with the ISSB standards. (In referring to Australian exposure draft standards, S1 and S2 will be used.)
Reporting requirements
The AASB is seeking to finalise the standards as soon as possible, reflecting the government’s policy intention. Mandatory adoption is currently stated to be implemented in three stages, with the affected entities grouped according to size criteria set by Treasury.
At its first board meeting in June 2024, the AASB decided to pursue an approach that would see S1 available for voluntary adoption, with S2 being mandatory. This path was chosen recognising the AASB legislative mandate permits us to develop only climate reporting standards that will have force of law, rather than broader sustainability.
S1 provides a set of disclosure requirements designed to enable entities to communicate to stakeholders about sustainability-related risks and opportunities they face over the short, medium and long term. The climate-related disclosure- focused S2 requires an entity to disclose information about its exposure to significant climate-related risks and opportunities. It relates to the physical and transition effects of climate change and, like S1, is structured around four core elements — governance, strategy, risk management, and metrics and targets. It can be considered as being in two distinct parts.
The first part of S2 is the emissions-reporting requirement. This parallels financial reporting and is historical in nature. It looks at the emissions the entity has made, similar to how financial reporting looks at the revenue the entity brought in or expenditure made. As it is focused on past performance, it can be considered the application of a familiar approach to a novel context.
Three categories
The emissions reporting requirements are set out in three categories, Scope 1, 2 and 3. Group 1 entities that have been reporting under the National Greenhouse and Energy Reporting (NGER) Scheme will be familiar with the first two categories.
Scope 1 emissions are those made as a direct result of the entity’s business activities. A clear example is the emissions from an airline burning fuel in their aircraft.
Scope 2 emissions are indirect, arising from the entity’s business activities. A clear example is the emissions from electricity generation where the electricity purchased is being used in the entity’s business (office lighting, for example).
Scope 3 emissions are the new area, as reporting of these emissions is not required under NGER (although some NGER and non-NGER reporting corporations are already making these disclosures). These are often referred to as “upstream” and “downstream” emissions associated with the entity’s business and regarded as capturing the emissions arising within its entire value chain. In June, the AASB adopted the 15 categories of Scope 3 emissions identified in the Greenhouse Gas Protocol.
The second part to S2 is future-focused. This includes scenario analysis, which entities use to inform their disclosures about climate resilience. Being future-focused, it is unrealistic to expect that predictions will always be completely accurate. Based on public comments from ISSB members and, therefore, applicable to the ISSB-aligned Australian standards, the expectation is that entities are recognising the opportunities and risks associated with rising global temperature and have formulated strategies (or are in a position to do so) to respond accordingly. The disclosures required are geared towards those ends and are based on all reasonable and supportable information available without undue cost or effort.
The aim of S2 in Australia is to improve trust and confidence in climate-related disclosures through a common language for disclosing the effect of climate-related risks and opportunities on an entity’s prospects. They will help combat the challenges of greenwashing, enabling stakeholders to make better-informed decisions.
This article first appeared under the headline 'Sustainability Reporting’ in the August 2024 issue of Company Director magazine.
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